KSFC can’t ignore State-fixed guidance value while assessing property for mortgage loan: Karnataka High Court

In a verdict impacting the lending policy of the State-run financial institutions, the High Court of Karnataka has declared as illegal a methodology, adopted by the Karnataka State Financial Corporation (KSFC), which substantially lowers the value of a property than the guidance value fixed by the State government, when assessing the property for mortgage loan.

“The adoption of a valuation methodology by the KSFC, which is entirely detached from the guidance value recognised by the State for statutory purposes, not only creates administrative inconsistency but also results in practical injustice to loan applicants who seek to utilise their immovable properties as collateral security for obtaining financial assistance,” the court observed.

Justice Suraj Govindaraj passed the order while allowing a petition filed by Parwati of Vijayapura district.

Letter quashed

The court quashed a KSFC letter dated February 25, 2021, that had valued her properties offered for mortgage at approximately ₹40.8 lakh, less than one-tenth of its sub-registrar-fixed guidance value of ₹4.73 crore.

Meanwhile, the court directed the KSFC to reassess her loan application by applying guidance value for her property with the help of the jurisdictional sub-registrar. The petitioner, a homemaker, had applied for loan by mortgaging her properties to start a business.

The court rejected the KSFC’s contention that the guidance value of the property is only for registration purpose and the financial institution as to use conservative valuation for risk assessment.

The sub-registrar’s guidance value holds statutory weight and is used across multiple legal and administrative processes, and hence the KSFC cannot disregard it lightly, the court said.

Also, the court made it clear that the internal valuation methodology in KSFC’s lending policy is appropriate only when no guidance value exists or when land remains purely agricultural, but when the sub-registrar has notified a residential or commercial guidance value, that figure should serve as the primary benchmark for assessing property value for lending.

Further, the court said that the KSFC sanctions loans by valuing property at a markedly reduced figure, using its internal formula that relies on the land’s agricultural value plus a fixed percentage. Yet, when the same property is mortgaged through a registered instrument, the borrower is compelled to pay stamp duty and registration charges calculated based on the guidance value, which is much higher.

Borrower at disadvantage

This disparity, the court said, places the borrower at a clear disadvantage. As a result, the citizen absorbs the financial burden of the higher value without receiving a corresponding benefit in loan sanction, the court pointed out.

While KSFC may retain the discretion to undertake appropriate due diligence and risk assessment in determining the quantum of loan to be sanctioned, such determination cannot proceed on a valuation methodology that is wholly inconsistent with the statutory guidance value recognised by the State itself, the court said.